License agreement: main practical issues

October 4, 2018

In
recent years, business environment of Kazakhstan states the increase of number of
transactions related to franchising. Business structures provide their partners
or receive from them brands, trademarks, patents and other objects of exclusive
rights. Each party of these deals has certain advantages that can lead to beneficial
cooperation.

At the
same time, lawyers of Linkage & Mind are familiar with the cases when
interaction of the franchisor and the franchisee occurs in the way different
from the one planned before signing the contract. In such situations,
entrepreneurs apply to lawyers, and they, in turn, to the license agreements concluded
and applicable laws. As a result, the party which prevented risks in advance by
due care to the compliance of the agreement with the law, takes stronger
position.

Below
we will consider the most important aspects of Kazakhstan's legislation on a
franchise licensing and try to caution our partners against the typical
mistakes made when concluding license agreements.

To begin with, it is
proposed to turn to the definition of franchising provided by the Civil Code of
Kazakhstan (hereinafter referred to as the "Civil Code") and the Law
"On Franchising" (hereinafter - the "Law"): under a license
agreement, one party (the licensor) undertakes to provide the other party (the
licensee) for remuneration with a set of exclusive rights (a licensed complex),
including, in particular, the right to use a licensor’s company name and
protected commercial information, as well as other objects of exclusive rights
(trademark, service mark, patent, etc.) provided for by the agreement, for use
in the entrepreneurial activities of the licensee. The license agreement shall
provide for the use of a licensed complex, business reputation and commercial
experience of the licensor in a certain amount, with or without indication of
the territory of use, in relation to a certain area of activity (the sale of
goods received from the licensor or produced by the licensee, implementation of
other commercial activities, provision of services).

The aforesaid demonstrates the key role of agreement in
the relationships between the franchisor (licensor) and the franchisee
(licensee), as it should specify the volume, territory, scope of work and other
conditions for granting the franchise.

At the
same time, in our opinion, high attention should be paid to Article 900 of the
Civil Code, which establishes that the restrictive terms of the license
agreement are null and void, by virtue of which:

1) the licensor has the right to determine the sales price
of goods by the licensee or the price of the works (services) implemented
(provided) by the licensee, or to set the upper or lower limit of these prices;
or

2) the licensee has the right to sell goods, perform
work or provide services exclusively to a certain category of customers (clients)
or exclusively to customers (clients) who have a location (place of residence)
on the territory specified in the agreement.

The
reason for this restriction is the basic principles of Kazakhstan's legislation
on the protection of competition. In accordance with Article 4 of the Law, one
of the principles of governmental support of franchising in Kazakhstan is the
protection of competition and the restriction of monopolistic activities. Articles
169 and 170 of the Business Code of Kazakhstan define a number of criteria, in
accordance with which anticompetitive agreements and anticompetitive concerted
actions of market entities are prohibited. The ban on setting the upper or
lower limit of prices, as well as the territorial restriction of doing business
are, among others, in the list of the above criteria.

In this
regard, at the stage of discussing a deal on franchising, it is important to
understand these anticompetitive constraints, which can be decisive for
determining the terms of cooperation.

It also
seems important to highlight Article 901 of the Civil Code, according to which
the licensor bears subsidiary responsibility for the claims imposed on the
licensee in respect to non-conformity of the quality of goods (works, services)
sold (performed, rendered) under the license agreement. In accordance with Article
357 of the Civil Code, should the principal debtor (i.e. the licensee) refuse
to satisfy or not fully comply with the creditor's request or should the
creditor not receive a response from the debtor within a reasonable time, the
claim in the part unsatisfied can be brought to the person who has subsidiary
responsibility (i.e. the licensor).

Thus, the compulsory norm of the Civil Code cannot be changed by the license
agreement and, consequently, carries certain risks for the franchisor in
relation of improper fulfillment of obligations by the licensee before third
parties. As practice shows, these risks are rarely taken into account by the companies
providing franchises to their business partners.

Another important aspect of the cooperation in the framework of
franchising is the preemptive right granted to the licensor by Article 14 of
the Law with regard to the of licensee’s enterprise when it is in selling
process. Since this rule is also mandatory, no agreement of the parties can
exclude this right of the licensor and, accordingly, the licensee's obligation
to offer an enterprise for purchase by his franchisor before its alienation to
third parties.

These
duties of licensee are rarely fulfilled in practice, and licensors sometimes are
not aware of such a preemptive right, although the use of it can contribute to
the economic development of the company that provides brand and patents.

The aforesaid
demonstrates only some of the factors which justify that the activity in the area
of franchising, on the one hand, carries certain risks for the parties and, on
the other hand, grants them the rights the use of which can bring certain
privileges.

In this
regard, Linkage & Mind law firm proposes market players to pay due
attention to such a phenomenon as license agreement which at a first glance may
seem simple and void of risks.